Why Bitcoin’s Downward Trend Spells Trouble

This has been another week of disappointing price action for Bitcoin enthusiasts. On the five day chart, Bitcoin prices have dropped from near $455 down to $445. The good news, if you can label it as such, is that prices had reached $435 on Sunday before recovering on Monday.

For perspective, it might be illustrative to compare recent price action with the historical trend.

As you can see, Bitcoin has spent the bulk of its existence trading for mere pennies. It wasn’t until 2013, just last year, that the insane price hikes kicked in. Most everyone realized the sudden spike up was a speculative bubble that was going to end badly, the way speculative bubbles do.

Any attempt to apply traditional market analysis techniques to Bitcoin is just nonsense. Bitcoin is not a stock, option, currency or commodity in the traditional sense — and trying to apply market analysis techniques, developed for analyzing the trading patterns of actual stocks, options, currencies, and commodities, is not going to yield supportable results. Bitcoins are literally nothing but encrypted blips in a distributed network of computers, that belong to the person holding the proper cypher.

Bitcoin’s value can’t be calculated using traditional metrics, and any attempt to do so is at best folly and at worst deliberately misleading.

Before anyone thinks I’m dissing Bitcoin, let me remind readers that US currency is also nothing to most people but abstracted blips in a bank’s computer system that can be traded for paper that also has no intrinsic value. The only difference between Bitcoins and dollars is that dollars have the full faith and credit of the United States of America standing behind them, and that actually means quite a lot out in the real world.

I’m not suggesting Bitcoins have no value; I’m saying that a Bitcoin’s value can’t be calculated or analyzed using traditional metrics, and any attempt to do so is at best folly and at worst deliberately misleading. That statement is required as a backdrop in saying that “investing” in Bitcoin is financial insanity, and the steady decline in prices would apparently indicate that the message is finally sinking in.

Steadily declining prices create a dilemma for Bitcoin that doesn’t exist in other markets. If you buy Bitcoin today, you’re almost guaranteed to lose money on the purchase. If you’re a merchant that accepts Bitcoin, your optimum strategy is to immediately convert the Bitcoin into cash, otherwise you can actually watch your profit margin eroding on the five day chart. The speculative bubble was bad for Bitcoin because it attracted all the wrong types to the market, and set up an equally bad long-term decline that has no bottom. That decline discourages new players from getting involved and, since there’s no theoretical bottom to the market, the number of actual Bitcoin traders is going to continue to shrink until Bitcoin finally finds an equilibrium price. The long-term equilibrium price will likely be some number above $0, but what that exact number will be no one can say.

While dollars face an equally dismal fate in a declining market, the US dollar has the Federal Reserve to prop up its value. The price of gold and silver may decline, but both of those metals have an intrinsic value, to the jewelry industry if nowhere else. If the price of General Electric stock declines, I know the company can restructure, add new product lines, and make other changes to recover and grow. With Bitcoin there’s nothing putting a floor on that price, and no avenue for growth.

The influx of venture capital money and involvement of players like Richard Branson is a clear indicator that there is value in the Bitcoin concept. Right now that value is Bitcoin’s potential for the technology to democratize banking — and that potential is huge, but how do you price that? The simple answer is that, right now, you can’t.

Unless you’re fond of losing money, the wise course is to stay on the sidelines until Bitcoin finds a market niche which will lead to an equilibrium price.

Chris Poindexter is a freelance journalist and photographer living in South Florida. He writes for a wide variety of publications on subjects including personal finance, investing, treasure hunting, travel, science and technology. He’s the author of several books, including the wildly popular My House Has Wheels, 10,000 Miles In Town and The Recovery and Marine Salvage, Inc. fiction series. He can be reached at chris@chrispoindexter.com.